"Three Economists Walk into a Bar..."

We have written many times in the past about the problems with economic forecasts. The more specific they are, the more wrong they tend to be. And the consensus is usually wrong, as history shows. The problem is, it’s easy to fall for forecasts. People put a lot of focus and attention on them, using them to help make decisions.

We share here a link to an article by James Mackintosh of the Wall Street Journal, who writes a humorous but insightful perspective on economists’ forecasts. When are they useful, and when are they dangerous?

It’s a well-written reminder, especially with the World Economic Forum in Davos underway.

To summarize the story, for those without a subscription, Mackintosh points out:

There's an old joke that God invented economists to make weather forecasters look good. The challenge is that weather forecasts don't change the weather, but economic forecasts can change the economy.

Whether meteorology or economics, it is incredibly difficult to predict the outcome of complex systems, even if the forecast comes from a well-researched source. The reason is because those systems can produce radically different outcomes due to very small changes.

What will US growth be in 2017? “It depends.” Current forecasts call for 2.25%, but “history suggests you should put little trust in the number.” Economics is not good at predicting big turning points in the economy, such as recession or accelerating growth.

All jokes aside, not all economic forecasts are bad. They can be quite useful. The key is in the assumptions, and how transparent they are. He points out that it is important to think in terms of long range probabilities and broad categories over long periods, rather than precise predictions. In this way, users of forecasts can understand the drivers and possible scenarios when making decisions.